When Jim Chancellor of Fiction Records was presented with the Music Week award for A&R of the year recently by Elbow's Guy Garvey, he ran up on stage, jumped on top of the singer and wrapped his arms and legs around him. Not the usual behaviour of a record label executive, you'd imagine. Yet, sitting with Chancellor in his office on the eve of the release of their new album, Build a Rocket Boys!, the love and passion he feels for Elbow is obvious. "It's a work of utter beauty," he says.

Chancellor's relationship with Elbow goes back many years. He followed the band for a decade before finally managing to buy them out of their previous deal with V2. "They started The Seldom Seen Kid before we got the deal done. I wasn't allowed to hear a note until the deal was signed, for legal reasons. When I finally sat down with them to listen to it they asked me what I thought, and I was blown away – The Loneliness of a Tower Crane Driver was the most staggeringly beautiful piece of music I'd ever heard," he says. "Maybe that's all the A&R they needed, someone to tap them on the back saying 'that was great'."

Some bands write many songs for an album, and need the help of an A&R to point out which ones are potential singles. But Chancellor says Elbow are brilliant at weeding out rubbish themselves. Even though he thought The Seldom Seen Kid was "utterly brilliant", the radio department at Polydor/Universal, of which Fiction is a subsidiary, said they needed a crossover track – an anthem, if you will – to plug to radio. "Leave it with me," Garvey told Chancellor. A week later, the band delivered One Day Like This.

For some bands, winning the Mercury prize has been a curse, but for Elbow it brought them a wider audience when they won in 2008. "We enter two or three records [for the Mercury prize] every year," says Chancellor. "Pretty much anybody can do it. I think they had about 127 applicants last year. It costs you a few hundred quid. You have to send them a whole bunch of records and press, and then they hone it down to the finalists, supposedly solely based on it being a great record."

So what about the follow-up? "It's hard to follow a record that, in some people's eyes, is perfect," says Chancellor. "A&R is about engaging the artist and finding out how to get the best out of them, to make sure they deliver the best possible record they could make in their entire lives. The problem is you've got to do that every single time. It might be to send them to Malibu to do some writing, as we've done with Snow Patrol. Elbow went to the Isle of Mull for a week, to hang out and jam.

"Rock isn't dead – that's a load of old bollocks," he continues, referring to recent reports on the lack of rock artits in the top 40. "We managed to sell quite a lot of records last year. It's become a hell of a lot harder. We can't spend as much money as we used to. It's really tough, but because we've had a few successes, it's given us the chance to sign more artists.

"The figures on album sales are not as bad as people think. They're not great, but a lot of that is because there's nowhere to sell them any more. Going into a book shop, you always buy a book you didn't plan to buy, and that was the beauty of record shops."

Chancellor maintains that bands still need labels, which are now offering much fairer multi-service partnership deals and revenues split 50/50 or 75/25 with the artist, depending on the investment required. I ask him if his acts agree. "I sincerely hope so. The other side of the coin is: who in their right mind is going to give four unemployed guys from Manchester £150,000 and just tell them 'make some music, and let's see what happens'. Would you get that from a bank? No chance. We just say: 'Give us a song and we'll see what we can do. Bands who have gone out there trying to do it all by themselves have realised it's tough. Our job is to spread the music."

But getting a record deal is just the beginning. By the time Fiction signed Snow Patrol, the band had already released two albums on the indie label Jeepster. "By then, they were very hungry for success. They worked like titans to promote Final Straw. Yes, it's tough to get a deal – and it should be, because it's quite a commitment."

Will Elbow break America, like Snow Patrol? "A band has got to want that," says Chancellor. "And it costs a lot of money to support extensive touring. White Lies [another Fiction band] want that international success, and they've made an awful lot of effort to do that. They've been everywhere and they're seeing results. They're now getting into a position, everywhere but the US, so far, where they don't need money from me any more – because they've built such a live following."

The label also works like a hothouse for new talent, helping acts grow through regional touring, putting out a few EPs and working the specialist areas, before introducing them to the rest of Polydor. "We give them the chance to quit their day job," says Chancellor.

At a recent Universal open day, I asked him what Universal is doing to change the perception that major labels are bad guys who rip off artists. He replied that all they can do is treat artists right, so that they'll go out and speak positively about the label. "We're very proud of what we do. We don't feel like we're taking anybody to the cleaners, and the label is trying to be more transparent." Judging by Guy Garvey's gushing testimony, he may be right.